Monday, September 17, 2007

How About Reagan and Thatcher?

Washington and Wall Street are all atwitter over Alan Greenspan’s new book, The Age of Turbulence. Of course, the mainstream media are headlining Greenspan’s criticism of President Bush and the Republican Congress. Hastert and Company spent way too much and Mr. Bush failed to use his veto pen. Who can argue with that? Supply-siders and all conservatives have made this point.

But Greenspan points a finger at today’s Democrats as well. Greg Ip’s Wall Street Journal article, “Greenspan’s Dismay Extends Both Ways,” makes this case.

In an interview with the WSJ, Greenspan remarked that “The Clinton administration was a pretty centrist party. … But they’re not governing again. The next administration may have the Clinton administration name but the Democratic party … has moved … very significantly in the wrong direction,” referring to the Democratic party’s populist bent — especially its ill-advised skepticism of free trade.

And in his 60 Minutes interview last night, while Greenspan referred to Hillary Clinton as “unquestionably capable” and “very smart,” his “tendency would be to vote Republican.” Adding to his remarks, Greenspan — a self-described libertarian Republican — told the WSJ about the upcoming election, “I doubt if I would vote Democrat … I just may not vote. At the moment it’s extremely hard to say.”

It’s important to remember that Greenspan supported both Bush tax cuts in 2001 and 2003. And even without more spending restraint, the supply-side tax cut of 2003 worked to reignite the economy and throw off potfulls of added tax revenues. Meanwhile, the budget deficit has been falling for years.

Greenspan makes interesting points on the housing boom. He argues that it was sparked by a global boom, fueled by the downfall of communism and simultaneous rise of capitalism worldwide. He said that “a billion” new workers were liberated for productive jobs and higher wages, and that this created a worldwide housing boom. He said that same shift to global capitalism also brought down inflation and interest rates worldwide.

On the whole, Alan Greenspan was an excellent Fed chairman during his tenure from 1987 to 2005. The numbers bear this out: Real economic growth averaged 3 percent; inflation averaged 2.5 percent while unemployment averaged 5.5 percent; and the stock market increased about 420 percent, or roughly 10 percent yearly.

So the Maestro did a very good job.

But the real hero of the last couple of decades is undoubtedly the triumph of free-market capitalism around the world. Krishna Guha of the Financial Times is the only one to have picked this up. He captures this nicely in his book review of The Age of Turbulence. Give credit to Adam Smith’s “invisible hand” and Joseph Schumpeter’s “gales of creative destruction” for making Alan Greenspan’s Fed job a lot easier.

And while we’re at it, let’s give big credit for this remarkable twenty-five years of prosperity to Ronald Reagan and Margaret Thatcher.